Economic stability increases substantially in Latin America
15 Jun '07
3 min read
Even if the external environment were to deteriorate, a combination of adequate policy response and improved fundamentals would limit the economic and financial fall-out. LatAm has changed fundamentally.
Latin American capital markets are gradually maturing on the back of increased stability. On the supply side, declining external financing needs have led to increased domestic sovereign and non-sovereign debt issuance. More liquid and deeper domestic government bond markets have allowed other markets to take off, ranging from domestic private bond markets over domestic derivative markets to structured finance.
Domestic banks' international issuance has also been increasing on the back of net sovereign redemptions. On the demand side, “strategic” real money investors are increasingly putting money into LatAm, especially investment grade countries and countries on the cusp of investment grade.
In many cases stable domestic investor bases are emerging. Corporate governance reform has also increased domestic and foreign investor interest in local equity markets. In addition, greater economic and financial stability has lowered the cost of capital and pushed up equity market valuations.
Primary equity issuance has been booming, especially in Brazil. The new markets will inevitably go through periods of increased volatility. But improved economic stability will gradually lead to deeper and more sophisticated domestic capital markets. Thisprocess looks irreversible, at least in those LatAm countries that are on the cusp of investment grade.
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